Of all the ideas you may be considering for income after retirement, finding sources that are both aligned with your goals and able toprovide the level of income you need may be harder than you may anticipate. Once you’ve identified the potential retirement income sources, combining them into a well-planned retirement portfolio can be more challenging still—but with a solid understanding of your options, you should be able to find what works best for you.
You have a lot of options for retirement income—Social Security, investment income, collecting rent or even a part-time job—but not all of these ideas may be viable for you. For example, income-generating investments such as high-yield bonds, dividend-paying stocks and REITs get a lot of investor attention. There is a place for all of these assets in a well-constructed portfolio. But relying solely on income-producing investments after you retire may leave you under-diversified and unable to generate the growth you may need to achieve you financial goals.
The following are some of the more popular retirement income ideas and their potential benefits and limitations.
Most dividend-paying stocks generate cash quarterly, giving you tangible returns without accruing transaction fees. Enticing! But like all investments, dividend-paying stocks come with tradeoffs:
Most bonds offer fixed interest rates, which can give the impression that bonds are among the safest investments available. However, this is not true as bonds carry several types of risk:
In addition to these risks, bonds as a category have underperformed stocks as long-term investments , which could hinder reaching your retirement goals. However, Bonds can play a role in your retirement income plan, but we recommend using them as a buffer against the stock market’s volatility instead of as your primary income source.
If you are too focused on dividend-paying stocks or bonds, you may be overlooking another retirement income idea: homegrown dividends. A homegrown dividend approach is about holding a diversified and growth-driven portfolio of stocks that can be selectively sold to generatecash flow.
Because your cash flow is based on a stock’s growth potential, you can choose which stocks to keep and sell. You don’t have to hold on to a poorly performing stock just because it pays dividends.
Creating cash flow this way may also be more tax-efficient than dividend or bond coupon payments. When you sell a stock, it is taxed as a capital gain (or reportable as a capital loss), while dividend and bond income may be taxed at a higher rate as regular income. Please consult your tax advisor.
Investors who prefer less risky investments may seek out annuities for their promises of guaranteed lifetime income—especially after retirement when investors’ income streams generally shrink. But annuities come with their share of tradeoffs:
If your retirement plan requires equity-like growth to achieve your investment objectives, income from deferred or immediate annuities may be insufficient. They can be expensive and restrictive.
A CD is a promissory note issued by a bank. It entitles the CD owner to predictable interest for a pre-determined time period—anywhere from one month to five years. The downside to a CD’s predictable returns is the loss of liquidity.
Higher interest rates are generally associated with longer terms and also higher penalties if you make withdrawals before the CD matures. If you need money for any unforeseen circumstances, you may have to pay a significant penalty.
While CDs may give you slightly better returns than the average savings account, they may not be a reliable longer-term growth strategy. inflation could significantly impact the investment’s purchasing power. For example, a $100,000 CD paying 3% interest annually will generate $3,000 in income. However, the long-term annual average of inflation is 3%. So while the CD paid $3,000, the purchasing power of the $100,000 invested in the CD decreased by $3,000, thereby generating no net real return. Inflation may degrade returns over the CD’s investment time horizon.
Most retirees should consider Social Security to be a supplement to other retirement income. For many, Social Security won’t cover all expenses in retirement. If you plan to rely on Social Security benefits to meet your expenses, you may want to continue working until maximum benefits are available, which is generally at age 70.
Many of the investments mentioned in this article can be good choices if they are part of a well-diversified portfolio. Selecting the right investments to make money in retirement takes skill. To find out more about Fisher Investments’ unique portfolio construction strategy, familiarize yourself with our top-down investing approach.
Source: Global Financial Data, Inc (GFD). Average rate of return from 01/01/1926 through 31/12/2016. Equity return based on GFD’s World Return Index in GBP. The World Return Index is based upon GFD calculations of total returns before 1970. These are estimates by GFD to calculate the values of the World Index before 1970 and are not official values. GFD used specified weightings to calculate total returns for the World Index through 1969 and official daily data from 1970 on. Fixed Income return based on GFD’s Global USD Total Returm Government Bond Index and converted to GBP.